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Financial Guarantors and the 2007-2009 Credit Crisis

60 Pages Posted: 17 Mar 2010 Last revised: 21 Nov 2010

Siddharth Bhaskar Shenai

Harvard Business School

Randolph B. Cohen

Harvard Business School - Finance Unit

Daniel Bergstresser

Harvard Business School

Date Written: March 15, 2010

Abstract

More than half of the municipal bonds issued between 1995 and 2009 were sold with bond insurance. During the credit crisis the perceived credit quality of the financial guarantors fell, and yields on insured bonds exceeded yields on equivalent uninsured issues. It does not appear that either property and casualty insurers or open-end municipal mutual funds were dumping insured bonds; analysis of holdings data indicates that their propensity to sell bonds was unusually low for the issues insured by troubled insurers. At least on a bond-by-bond basis, the yield inversion phenomenon is also not explained by the rapid liquidation of Tender Option Bond (TOB) programs, which disproportionately held insured issues. Finally, during the recent crisis the insured bonds have become significantly less liquid than uninsured municipal debt.

Keywords: Municipal bonds, financial guarantors

JEL Classification: G1

Suggested Citation

Shenai, Siddharth Bhaskar and Cohen, Randolph B. and Bergstresser, Daniel, Financial Guarantors and the 2007-2009 Credit Crisis (March 15, 2010). AFA 2011 Denver Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1571627 or http://dx.doi.org/10.2139/ssrn.1571627

Siddharth Bhaskar Shenai

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Randolph B. Cohen

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6674 (Phone)
617-496-6592 (Fax)

Daniel B. Bergstresser (Contact Author)

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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